I provided some comments on the end to de-minimis shipments to the US amidst recent announcements by Temu and Shein that would suggest notable price rises for US consumers due to the ongoing trade dispute between China and the US.
I was quoted in this Newsweek piece. In my broader comments I added a few more reflections that did not make it into the piece but are offered here:
What’s happening here is that platforms like Temu and Shein have built their entire business model around exploiting a loophole in the customs system. The de minimis exemption was designed for a pre-digital era, allowing small value parcels (under $800 in the US) to enter without customs duties or formal entry requirements. This made sense when international shipping of small parcels was rare, but these Chinese platforms essentially industrialized this exception.
The business model is quite clever – instead of shipping in bulk and distributing locally (which would trigger tariffs), they ship millions of individual small parcels directly to consumers, bypassing the tariff system entirely. They’ve essentially built a parallel import system that circumvents the traditional customs infrastructure. These platforms often operate with minimal local employment, sometimes even setting up shop in tax havens within countries where the only visible layer is a website.
With the end of de minimis shipping, each of these small parcels now requires formal customs processing and duties. The administrative burden alone makes the model less economical, not to mention the actual tariffs now due. This naturally leads to price increases as we’re seeing. For US consumers, this means goods get more expensive – the artificially low prices they’ve enjoyed are now adjusting to reflect the actual cost of international trade. Small retailers who’ve built their businesses around drop-shipping from these platforms will face margin compression or need to raise prices themselves.
The de minimis loophole created an uneven playing field where Chinese direct shippers had a structural advantage over domestic retailers who had to incorporate duties into their cost structures. It also meant lost tax revenue and potentially circumvented product safety standards. The business model was essentially arbitraging regulatory differences rather than creating genuine economic value.
The adjustment might be painful in the short term, but it could lead to more sustainable and balanced trade relationships where competition happens on product quality and genuine efficiency rather than regulatory arbitrage.
Of course, it is important to consider the potential adverse effects for consumers. Work by Fajgelbaum and Khandelwal suggests that the current de-minimis regime benefits lower income households disproportionately. Their exercise suggests that cuts to de-minimis will hurt lower income households more as they document that these parcels disproportionately go to lower income postcodes. There is an important qualification to the findings though: the environmental footprint of de-minimis shipment is not sharp. Many of the low value parcels would be coming in with air-fright, while traditional retailers would use shipping in bulk. Cutting de minimis may help traditional retailers which have come under strain with the shift from offline to online commerce, which may not be desirable. This structural transformation has hollowed out traditional retail infrastructure in many towns and cities that often would have provided for lower skill service jobs. So the combined welfare effects may be ambiguous. Yet, with Temu and the likes it became apparent how huge the markups in retailing are relative to the cost of the underlying products sourced from China.
In addition to the direct circumvention of customs duties, there were further challenges for example with sales tax in US or VAT in European countries. The platforms may have enabled dropshipping businesses that often were not registered appropriately for tax in the markets where the products were sold. Of course, this is not a problem of Temu or Shein but of the countries in which these entities operate.
Of course, I think its preposterous to assume that after effectively cutting out Temu and Shein from the de-minimis exemption, that this will lead to a widespread revival of the high street and the traditional retail sector. Rather, it may lead to more monopolisation of the market by the few digital marketplaces that still exist. But from a regulatory perspective the playing field may become more “level”.
And when it comes to international affairs: the de-minims thresholds are highly asymmetric, with the US having been an outlier with a very generous threshold of USD 800.